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SECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549

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FORM 10-Q

(Mark One)

|/x/ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | ----------------------------------------------------------------------------------------

For the quarterly period ended December 31, 2001

or

|/ / | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|--- | -----------------------------------------------------------------------------------------

For the transition period from  to

Commission File Number 0-12950

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ALLIANCE PHARMACEUTICAL CORP.(Exact name of Registrant as specified in its charter)

New York(State or other jurisdiction of incorporation or organization)

14-1644018(I.R.S. Employer Identification Number)3040 Science Park Road San Diego, California(Address of principal executive offices)

92121Zip Code


Registrant's telephone number, including area code:858/410-5200

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Indicate
by a check whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to filing requirements for the past
90 days. Yes /x/    No / /

As
of February 11, 2002, Registrant had 17,307,673 shares of its Common Stock, $.01 par value, outstanding.

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES

|INDEX                                                                                         |                                                      | Page No.
|--------------------------------------------------------------------------------------------- | ---------------------------------------------------- | --------
|PART I  FINANCIAL INFORMATION                                                                |                                                      |         
|Item 1. Financial Statements                                                                  |                                                      |         
|                                                                                              | Condensed Consolidated Balance Sheets                |         
|                                                                                              | Condensed Consolidated Statements of Operations      |         
|                                                                                              | Condensed Consolidated Statements of Cash Flows      |         
|                                                                                              | Notes to Condensed Consolidated Financial Statements |         
|Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations |                                                      | 8       
|Item 3. Quantitative and Qualitative Disclosures About Market Risk                            |                                                      | 13      
|PART II  OTHER INFORMATION                                                                   |                                                      |         
|Item 6. Exhibits and Reports on Form 8-K                                                      |                                                      | 13      

2

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Part I Financial Information:

Item 1. Financial Statements

ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED BALANCE SHEETS

|                                               |                                                                                                                                                                                   | December 31, 2001 |                                      | June 30, 2001 |  
|---------------------------------------------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------- | ------------------------------------ | ------------- | -
|
|Assets                                         |                                                                                                                                                                                   |                   |                                      |               |  
|Current assets:                                |                                                                                                                                                                                   |                   |                                      |               |  
|                                               | Cash and cash equivalents                                                                                                                                                         |                   | $                                    | 8,190,000     |  
|                                               | Short-term investments                                                                                                                                                            |                   |                                      |              |  
|                                               | Other current assets                                                                                                                                                              |                   |                                      | 549,000       |  
|                                               |                                                                                                                                                                                   |                   |                                      |               |  
|                                               |                                                                                                                                                                                   |                   | Total current assets                 |               |  
|Property, plant and equipment  net            |                                                                                                                                                                                   |                   | 13,659,000                           |               |  
|Purchased technology  net                     |                                                                                                                                                                                   |                   | 11,680,000                           |               |  
|Restricted cash                                |                                                                                                                                                                                   |                   | 1,140,000                            |               |  
|Investment in joint venture                    |                                                                                                                                                                                   |                   | 5,000,000                            |               |  
|Other assets  net                             |                                                                                                                                                                                   |                   | 1,310,000                            |               |  
|                                               |                                                                                                                                                                                   |                   |                                      |               |  
|                                               |                                                                                                                                                                                   | $                 | 41,528,000                           |               | $
|                                               |                                                                                                                                                                                   |                   |                                      |               |  
|Liabilities and Stockholders' Equity (Deficit) |                                                                                                                                                                                   |                   |                                      |               |  
|Current liabilities:                           |                                                                                                                                                                                   |                   |                                      |               |  
|                                               | Accounts payable                                                                                                                                                                  |                   | $                                    | 1,958,000     |  
|                                               | Accrued expenses                                                                                                                                                                  |                   |                                      | 1,816,000     |  
|                                               | Current portion of long-term debt                                                                                                                                                 |                   |                                      |              |  
|                                               |                                                                                                                                                                                   |                   |                                      |               |  
|                                               |                                                                                                                                                                                   |                   | Total current liabilities            |               |  
|Deferred revenue                               |                                                                                                                                                                                   |                   | 10,000,000                           |               |  
|Long-term debt                                 |                                                                                                                                                                                   |                   | 21,368,000                           |               |  
|Stockholders' equity (deficit):                |                                                                                                                                                                                   |                   |                                      |               |  
|                                               | Preferred stock  $.01 par value; 5,000,000 shares authorized; 700,000 and 600,000 shares of Series F issued and outstanding at December 31, 2001 and June 30, 2001, respectively |                   |                                      | 7,000         |  
|                                               | Common stock  $.01 par value; 125,000,000 shares authorized; 17,186,769 and 9,908,214 shares issued and outstanding at December 31, 2001 and June 30, 2001, respectively         |                   |                                      | 172,000       |  
|                                               | Additional paid-in capital                                                                                                                                                        |                   |                                      | 457,491,000   |  
|                                               | Accumulated comprehensive income (loss)                                                                                                                                           |                   |                                      |              |  
|                                               | Accumulated deficit                                                                                                                                                               |                   |                                      | (451,284,000  | )
|                                               |                                                                                                                                                                                   |                   |                                      |               |  
|                                               |                                                                                                                                                                                   |                   | Total stockholders' equity (deficit) |               |  
|                                               |                                                                                                                                                                                   |                   |                                      |               |  
|                                               |                                                                                                                                                                                   | $                 | 41,528,000                           |               | $
|                                               |                                                                                                                                                                                   |                   |                                      |               |  

See
Accompanying Notes to Condensed Consolidated Financial Statements

3

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

|                                              |                              | Three months ended
December 31, |             | Six months ended
December 31, |  
|--------------------------------------------- | ---------------------------- | ------------------------------- | ----------- | ----------------------------- | -
|
|
|Revenues:                                     |                              |                                 |             |                               |  
|                                              | License and research revenue |                                 | $           | 44,000                        |  
|Operating expenses:                           |                              |                                 |             |                               |  
|                                              | Research and development     |                                 |             | 8,412,000                     |  
|                                              | General and administrative   |                                 |             | 1,869,000                     |  
|                                              |                              |                                 |             |                               |  
|                                              |                              |                                 | 10,281,000  |                               |  
|                                              |                              |                                 |             |                               |  
|Loss from operations                          |                              |                                 | (10,237,000 | )                             |  
|Imputed interest expense on convertible notes |                              |                                 |            |                               |  
|Investment income                             |                              |                                 | 72,000      |                               |  
|Interest expense                              |                              |                                 | (375,000    | )                             |  
|                                              |                              |                                 |             |                               |  
|Net loss applicable to common shares          |                              | $                               | (10,540,000 | )                             | $
|                                              |                              |                                 |             |                               |  
|Net loss per common share:                    |                              |                                 |             |                               |  
|                                              | Basic and diluted            |                                 | $           | (0.79                         | )
|                                              |                              |                                 |             |                               |  
|Weighted average shares outstanding:          |                              |                                 |             |                               |  
|                                              | Basic and diluted            |                                 |             | 13,268,000                    |  
|                                              |                              |                                 |             |                               |  

See
Accompanying Notes to Condensed Consolidated Financial Statements

4

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES  CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                        |                                                                   | Six months ended
December 31,                     |                                             
|----------------------------------------------------------------------- | ----------------------------------------------------------------- | ------------------------------------------------- | --------------------------------------------
|
|
|Operating activities:                                                   |                                                                   |                                                   |                                             
|                                                                        | Net loss                                                          |                                                   | $                                           
|                                                                        | Adjustments to reconcile net loss to net cash used in operations: |                                                   |                                             
|                                                                        |                                                                   | Depreciation and amortization                     |                                             
|                                                                        |                                                                   | Imputed interest expense on convertible notes     |                                             
|                                                                        |                                                                   | Expense associated with warrant and debt issuance |                                             
|                                                                        |                                                                   | Loss (gain) on sale of equity securities          |                                             
|                                                                        |                                                                   | Non-cash compensation  net                       |                                             
|                                                                        |                                                                   | Changes in operating assets and liabilities:      |                                             
|                                                                        |                                                                   |                                                   | Research revenue receivable                 
|                                                                        |                                                                   |                                                   | Restricted cash and other assets            
|                                                                        |                                                                   |                                                   | Accounts payable, accrued expenses and other
|                                                                        |                                                                   |                                                   |                                             
|Net cash used in operating activities                                   |                                                                   |                                                   | (10,693,000                                 
|                                                                        |                                                                   |                                                   |                                             
|Investing activities:                                                   |                                                                   |                                                   |                                             
|                                                                        | Sales and maturities of short-term investments                    |                                                   |                                             
|                                                                        | Cash acquired from MBI acquisition                                |                                                   |                                             
|                                                                        | Property, plant and equipment                                     |                                                   |                                             
|                                                                        |                                                                   |                                                   |                                             
|Net cash provided by (used in) investing activities                     |                                                                   |                                                   | (128,000                                    
|                                                                        |                                                                   |                                                   |                                             
|Financing activities:                                                   |                                                                   |                                                   |                                             
|                                                                        | Issuance of common stock  net                                    |                                                   |                                             
|                                                                        | Issuance of convertible preferred stock  net                     |                                                   |                                             
|                                                                        | Proceeds from long-term debt                                      |                                                   |                                             
|                                                                        | Proceeds from option to purchase convertible notes                |                                                   |                                             
|                                                                        | Principal payments on long-term debt                              |                                                   |                                             
|                                                                        |                                                                   |                                                   |                                             
|Net cash provided by financing activities                               |                                                                   |                                                   | 12,826,000                                  
|                                                                        |                                                                   |                                                   |                                             
|Increase in cash and cash equivalents                                   |                                                                   |                                                   | 2,005,000                                   
|Cash and cash equivalents at beginning of period                        |                                                                   |                                                   | 6,185,000                                   
|                                                                        |                                                                   |                                                   |                                             
|Cash and cash equivalents at end of period                              |                                                                   | $                                                 | 8,190,000                                   
|                                                                        |                                                                   |                                                   |                                             
|Supplemental disclosure of cash flow information:                       |                                                                   |                                                   |                                             
|                                                                        | Interest paid                                                     |                                                   | $                                           
|Supplemental disclosure of non-cash investing and financing activities: |                                                                   |                                                   |                                             
|                                                                        | Issuance of common stock related to MBI acquisition               |                                                   | $                                           
|                                                                        | Net liabilities acquired from MBI acquisition                     |                                                   | $                                           
|                                                                        | Issuance of common stock upon conversion of notes                 |                                                   | $                                           

See
Accompanying Notes to Condensed Consolidated Financial Statements

5

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ALLIANCE PHARMACEUTICAL CORP. AND SUBSIDIARIES        NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Alliance Pharmaceutical Corp. and its subsidiaries (collectively, the "Company" or "Alliance") are engaged in identifying, designing, and developing novel medical
products.

Principles of Consolidation

The consolidated financial statements include the accounts of Alliance Pharmaceutical Corp., the accounts of its wholly owned subsidiary Molecular
Biosystems, Inc. ("MBI") from the acquisition date of December 29, 2000, its wholly owned subsidiaries Astral, Inc., MDV Technologies, Inc., Alliance Pharmaceutical GmbH,
and its majority-owned subsidiary Talco Pharmaceutical, Inc. All significant intercompany accounts and transactions have been eliminated. Certain amounts in fiscal 2001 have been reclassified
to conform to the current year's presentation.

Interim Condensed Financial Statements

The condensed consolidated balance sheet as of December 31, 2001, the condensed consolidated statements of operations for the three and six months ended
December 31, 2001 and 2000, and the condensed consolidated statements of cash flows for the six months ended December 31, 2001 and 2000
are unaudited. In the opinion of management, such unaudited financial statements include all adjustments, consisting only of normal recurring accruals, necessary for a fair presentation of the results
for the periods presented. Interim results are not necessarily indicative of the results to be expected for the full year. The financial statements should be read in conjunction with the Company's
consolidated financial statements and footnotes thereto included in the Company's annual report on Form 10-K for the year ended June 30, 2001.

Purchased Technology

The purchased technology was primarily acquired as a result of the merger of Fluoromed Pharmaceutical, Inc. into a subsidiary of the Company in 1989. The
technology acquired is the Company's core perfluorochemical ("PFC") technology and was valued based on an analysis of the present value of future earnings anticipated from this technology at that
time. The Company identified alternative future uses for the PFC technology, including theOxygent(temporary blood substitute) product.
Purchased technology also includes $4.5 million for technology capitalized as a result of the acquisition of MBI in December 2000.

The
PFC technology is the basis for the Company's main drug development programs and is being amortized over a 20-year life. The PFC technology has a net book value of
$8.3 million and $8.9 million, and is reported net of accumulated amortization of $14.9 million and $14.3 million at December 31, 2001 and June 30, 2001,
respectively. The technology acquired from MBI has a book value of $3.4 million and $3.9 million, net of accumulated amortization of $1.1 million and $559,000 at
December 31, 2001 and June 30, 2001, respectively, and is being amortized over four years.

The
carrying value of purchased technology is reviewed periodically based on the projected cash flows to be received from license fees, milestone payments, royalties and other product
revenues. If such cash flows are less than the carrying value of the purchased technology, the difference will be charged to expense.

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Comprehensive Income and Loss

Effective July 1, 1998, the Company adopted the Financial Accounting Standards Board's Statement No. 130, Comprehensive Income ("SFAS
No. 130"). SFAS No. 130 establishes new rules for the reporting and display of comprehensive income and its components; however, the adoption of SFAS No. 130 had no impact on the
Company's net loss or stockholders' equity. SFAS No. 130 requires unrealized gains and losses on the Company's available-for-sale securities to be included in
comprehensive income. During the three months ended December 31, 2001 and 2000, the total comprehensive loss, which includes the unrealized gain or loss on
available-for-sale securities, was $10,540,000 and $16,019,000,
respectively. During the six months ended December 31, 2001 and 2000, the total comprehensive loss, which includes the unrealized gain or loss on available-for-sale
securities, was $17,198,000 and $33,004,000, respectively.

Net Loss Per Share

The Company computes net loss per common share in accordance with Financial Accounting Standards Board's Statement No. 128, Earnings Per Share ("SFAS
No. 128"). SFAS No. 128 requires the presentation of basic and diluted earnings per share amounts. Basic earnings per share is calculated based upon the weighted average number of common
shares outstanding during the period while diluted earnings per share also gives effect to all potential dilutive common shares outstanding during the period such as common shares underlying options,
warrants, and convertible securities, and contingently issuable shares. All potential dilutive common shares have been excluded from the calculation of diluted earnings per share as their inclusion
would be anti-dilutive.

Stockholders' Equity (Deficit)

On October 18, 2001, a 1:5 reverse stock split that had been approved at the Company's Annual Meeting of Shareholders became effective. All share and per
share related data in the consolidated financial statements have been adjusted to reflect the reverse stock split for all periods presented.

New Accounting Requirements

In July 2001, the Financial Accounting Standards Board ("FASB") issued FASB Statements Nos. 141 and 142 (FAS 141 and FAS 142), "Business
Combinations" and "Goodwill and Other Intangible Assets." FAS 141 replaces APB 16 and eliminates pooling-of-interests accounting prospectively. It also provides guidance
on purchase accounting related to the recognition of intangible assets and accounting for negative goodwill. FAS 142 changes the accounting for goodwill from an amortization method to an
impairment-only approach. Under FAS 142, goodwill will be tested annually and whenever events or circumstances occur indicating that goodwill might be impaired. FAS 141 and
FAS 142 are effective for all business combinations completed after June 30, 2001. Upon adoption of FAS 142, amortization of goodwill recorded for business combinations
consummated prior to July 1, 2001 will cease, and intangible assets acquired prior to July 1, 2001 that do not meet the criteria for recognition under FAS 141 will be reclassified
to goodwill. Companies are required to adopt FAS 142 for fiscal years beginning after December 15, 2001, but early adoption is permitted under certain circumstances. The adoption of
these standards is not expected to have a material impact on the Company's results of operations and financial position.

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2. Subsequent Event

On January 17, 2002, the Company announced that it has submitted documents to the U.S. Food and Drug Administration ("FDA") and to European regulatory
authorities regarding resumption of the clinical development ofOxygent. The regulatory submissions included an Interim Integrated Safety Summary
("IISS") containing data from all clinical studies conducted with the product, as well as a new Phase 3 clinical plan. Following the regulatory submissions, Baxter Healthcare Corporation ("Baxter")
made an additional investment of $2 million in Alliance convertible preferred stock. The $2 million payment is part of a previously reported $19 million obligation that will be
paid to Alliance as certain milestones are met in order for Baxter to maintain its rights to the product.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations(References to years are to the Company's fiscal years ended June 30.)

Since
commencing operations in 1983, the Company has applied substantially all of its resources to research and development programs and to clinical trials. The Company has incurred
losses since inception and, as of December 31, 2001, has an accumulated deficit of $451.3 million. The Company expects to incur significant losses over at least the next few years as the
Company continues its research and product development efforts and attempts to commercialize its products.

The
Company's revenues have come primarily from collaborations with corporate partners, including research and development and milestone payments. The Company's expenses have consisted
primarily of research and development costs and administrative costs. To date, the Company's revenues from the sale of products have not been significant. The Company believes its future operating
results may be subject to quarterly fluctuations due to a variety of factors, including the timing of future collaborations and the achievement of milestones under collaborative agreements, whether
and when new products are successfully developed and introduced by the Company or its competitors, and market acceptance of products under development.

Liquidity and Capital Resources

Through December 2001, the Company financed its activities primarily from public and private sales of equity and funding from collaborations with corporate
partners.

A
private placement financing was completed on October 31, 2001, pursuant to which Alliance received proceeds of $15,100,150 and issued 4,314,329 shares of its common stock at
$3.50 per share and warrants to purchase 4,334,329 shares of its common stock at $4.20 per share to a group of institutional investors. In November 2001, the Company issued an additional
153,174 shares of its common stock to
the investors and reduced the warrant exercise price to $4.06 per share. Pursuant to the terms of the purchase agreement and the warrants, the number of shares issued to the investors and the warrant
exercise price were both subject to adjustment based on the volume weighted average price of Alliance's common stock during the 10 trading days beginning November 15, 2001, which was $3.38.

In
October 2001, the Company entered into a Contribution Agreement with certain holders of its Four-Year, 5% Subordinated Convertible Debentures (the "Debentures"),
pursuant to which the Debenture holders agreed to exchange $9.5 million principal amount of their Debentures for shares of Alliance's common stock. The number of shares issued to the Debenture
holders was based on the volume weighted average price of Alliance's common stock during the 10 days trading beginning November 15, 2001. Accordingly, on November 30, 2001,
Alliance issued 2,810,651 shares of its

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common stock to the Debenture holders in exchange for their Debentures, which Debentures were canceled by Alliance.

In
June 1998, the Company entered into a loan and security agreement with a bank to provide up to $15 million at the bank's prime rate plus 0.5%. Amounts borrowed were
secured by a $3.2 million restricted certificate of deposit and certain fixed assets and patents, and were scheduled to be repaid over three years. In October 2001, the certificate of
deposit was liquidated and the loan was paid in full.

In
August 2001, the Company announced the amendment of theOptison® Product Rights Agreement ("OPRA") dated
May 9, 2000 between Mallinckrodt, a unit of Tyco Healthcare, and the Company's subsidiary, MBI.Optison, an intravenous ultrasound contrast
agent, was developed by MBI and has been marketed by Mallinckrodt in the U.S. and Europe. Under the original terms of OPRA, Mallinckrodt was to pay MBI a royalty of 5% of net sales of Optisonin the
U.S. and Europe for as long as Mallinckrodt was marketing the product. MBI has received royalties of approximately $200,000 per quarter
from Mallinckrodt this year. Under the modified agreement, MBI received $5 million in cash and is entitled to potential royalties for two years in lieu of any further payments.

In
May 2000, Alliance and Baxter entered into a joint venture for the manufacture, marketing, sales and distribution ofOxygentin
the United States, Canada and countries in the European Union (the "Baxter Territory"). The companies formed PFC Therapeutics, LLC ("PFC Therapeutics") to oversee the further development, manufacture,
marketing, sales and distribution ofOxygent; and each party invested $5 million in PFC Therapeutics. In connection with the transaction, PFC
Therapeutics obtained an exclusive license from Alliance in the Baxter Territory, to manufacture and market all of the Company's injectable perfluorochemical emulsions capable of transporting oxygen
in therapeutic effective amounts in the bloodstream, includingOxygent.PFC Therapeutics paid Alliance a prepaid royalty of $10 million, which
has been recorded as deferred revenue. Alliance and Baxter will also share in the distribution of PFC Therapeutics' future cash flows. Under the arrangement, Alliance will continue to fund the current
development plan forOxygent'sinitial approval in the Baxter Territory. PFC Therapeutics has a right of first offer to license Oxygentin one or more
countries outside the Baxter Territory. Pursuant to a manufacturing and supplier agreement between Alliance and PFC Therapeutics,
Alliance will initially manufactureOxygentfor distribution in the Baxter Territory. Under separate agreements between Baxter and PFC Therapeutics,
Baxter will have the exclusive right to promote, market, distribute and
sellOxygentin the Baxter Territory, and Baxter has the right to take over the manufacturing responsibility for Oxygent. In connection with this
arrangement, Baxter purchased 500,000 shares of the Company's convertible Series F Preferred Stock for
$20 million. Initially, in order for Baxter to maintain its rights to commercialize the product, Baxter was required to purchase an additional $30 million of convertible redeemable
preferred stock through September 2001. In May 2001, because of a revised product development schedule, the Company and Baxter modified the expected payments, and Baxter purchased an
additional $4 million of Series F Preferred Stock and $3 million of certainOxygentrelated equipment in lieu of purchasing the
same amount of preferred stock, in a transaction accounted for as a sale and lease-back. In August 2001, Baxter purchased another $4 million of the Company's Series F
Preferred Stock and the companies agreed to restructure the remaining $19 million stock purchases originally scheduled for 2001 in order to reflect the timeline revisions in the clinical and
regulatory plans, and in order for Baxter to maintain its rights to the product. Subsequent to December 31, 2001, Baxter made an additional investment of $2 million in Alliance
convertible preferred stock. The remaining $17 million obligation will be paid to the Company

9

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if certain milestones are reached during the development of the new pivotal Phase 3 trial protocol and the conduct of the study.

The
Company had net working capital of $5 million at December 31, 2001, compared to a deficit of ($862,000) at June 30, 2001. The Company's cash, cash equivalents,
and short-term investments increased to $8.2 million at December 31, 2001, from $6.3 million at June 30, 2001. The increase resulted primarily from net proceeds
of $13.7 million from the October 2001 private placement financing and by net proceeds of $3.8 million from the sale of preferred stock, partially offset by net cash used in
operations of $10.7 million and principal payments (paid with restricted and unrestricted cash) on long-term debt of $4.6 million. The Company's operations to date have
consumed substantial amounts of cash and are expected to continue to do so for the foreseeable future.

The
Company continually reviews its product development activities in an effort to allocate its resources to those product candidates that the Company believes have the greatest
commercial potential. Factors considered by the Company in determining the products to pursue include projected markets and need, potential for regulatory approval and reimbursement under the existing
healthcare system, status of its proprietary rights, technical feasibility, expected and known product attributes, and estimated costs to bring the product to market. Based on these and other factors,
the Company may from time to time reallocate its resources among its product development activities. Additions to products under development or changes in products being pursued can substantially and
rapidly change the Company's funding requirements.

The
Company expects to incur substantial expenditures associated with product development, particularly forOxygent and
Imavist.The Company may seek additional collaborative research and development relationships with suitable corporate partners for its non-licensed
products. There can be no assurance that such relationships, if any, will successfully reduce the Company's funding requirements. Additional equity or debt financing may be required, and there can be
no assurance that such financing will be available on reasonable terms, if at all. If adequate funds are not available, the Company may be required to delay, scale back, or eliminate one or more of
its product development programs, or obtain funds through arrangements with collaborative partners or others that may require
the Company to relinquish rights to certain of its technologies, product candidates, or products that the Company would not otherwise relinquish.

Alliance
anticipates that its current capital resources, expected milestone payments by Baxter and expected revenue from investments will be adequate to satisfy its capital requirements
through at least fiscal 2002. The Company's future capital requirements will depend on many factors, including, but not limited to, continued scientific progress in its research and development
programs, progress with preclinical testing and clinical trials, the time and cost involved in obtaining regulatory approvals, patent costs, competing technological and market developments, changes in
existing collaborative relationships, the ability of the Company to establish additional collaborative relationships, and the cost of manufacturing scale-up.

While
the Company believes that it can produce materials for clinical trials and the initial market launch forOxygentand Imavistat its existing San Diego,
California facilities,it may need to expand its commercial
manufacturing capabilities for its products in the future. Any expansion for any of its products may occur in stages, each of which would require regulatory approval, and product demand could at times
exceed supply capacity. The Company has not selected a site for such expanded facilities and cannot predict the amount it will expend for the construction of such facilities. There can be no

10

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assurance as to when or whether the FDA will determine that such facilities comply with Good Manufacturing Practices. The projected location and construction of such facilities will depend on
regulatory approvals, product development, and capital resources, among other factors. The Company has not obtained any regulatory approvals for its production facilities for these products, nor can
there be any assurance that it will be able to do so. The Company currently has responsibility for manufacturingOxygent; however, Baxter has the right
to take over responsibility for manufacturing the product for sale in the Baxter Territory. The license agreement with Schering AG, Germany ("Schering") requires the Company to manufacture products at
its San Diego facility for a period of time after market launch at a negotiated price. Schering will be responsible for establishing production capacity beyond the maximum capacity of the San Diego
facility. The Company sold its facility in Otisville, New York in June 2001.

Except
for historical information, the statements made herein and elsewhere are forward-looking. The Company wishes to caution readers that these statements are only predictions and that
the Company's business is subject to significant risks. The factors discussed herein and other important factors, in some cases have affected, and in the future could affect, the Company's actual
results and could cause the Company's actual consolidated results for 2002, and beyond, to differ materially from those expressed in any forward-looking statements made by, or on behalf of, the
Company. These risks include, but are not limited to, the inability to obtain adequate financing for the Company's development efforts; the inability to enter into collaborative relationships to
further develop and commercialize the Company's products; changes in any such relationships, or the inability of any collaborative partner to adequately commercialize any of the Company's products;
the uncertainties associated with the lengthy regulatory approval process, including uncertainties associated with FDA decisions and timing on product development or approval; and the uncertainties
associated with obtaining and enforcing patents important to the Company's business; and possible competition from other products. Furthermore, even if the Company's products appear promising at an
early stage of development, they may not reach the market for a number of important reasons. Such reasons include, but are not limited to, the
possibilities that the potential products will be found ineffective during clinical trials; failure to receive necessary regulatory approvals; difficulties in manufacturing on a large scale; failure
to obtain market acceptance; and the inability to commercialize because of proprietary rights of third parties. The research, development, and market introduction of new products will require the
application of considerable technical and financial resources, while revenues generated from such products, assuming they are developed successfully, may not be realized for several years. Other
material and unpredictable factors which could affect operating results include, without limitation, the uncertainty of the timing of product approvals and introductions and of sales growth; the
ability to obtain necessary raw materials at cost-effective prices or at all; the effect of possible technology and/or other business acquisitions or transactions; and the increasing
emphasis on controlling healthcare costs and potential legislation or regulation of healthcare pricing.

Results of Operations

Six Months ended December 31, 2001 as Compared with Six Months ended December 31, 2000

The
Company's license and research revenue increased to $5.1 million for the six months ended December 31, 2001, compared to $410,000 for the six months ended
December 31, 2000. The increase was primarily a result of the $5 million received from Mallinckrodt in connection with the amendment of the OptisonProduct Rights Agreement in
August 2001.

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Research
and development expenses decreased by 39% to $17 million for the six months ended December 31, 2001, compared to $27.8 million for the six months ended
December 31, 2000. The decrease in expenses was primarily due to a $7.8 million decrease in payments to outside researchers for clinical trials and other product development work, a
$2.4 million decrease in staffing costs for employees engaged in research and development activities, as well as other decreases related to the Company's research and development activities.
The Company expects research and development expenses to decrease in 2002 compared to 2001, due to reduced clinical trial expenses.

General
and administrative expenses decreased by approximately 3% to $4.5 million for the six months ended December 31, 2001, compared to $4.7 million for the six
months ended December 31, 2000. The decrease in general and administrative expenses was primarily due to decreased professional fees and staffing costs.

Investment
income was $183,000 for the six months ended December 31, 2001, compared to $4.7 million for the six months ended December 31, 2000. The decrease was
primarily a result of a decrease in realized gains from the sale of short-term investments.

Interest
expense was $1.1 million for the six months ended December 31, 2001, compared to $1.3 million for the six months ended December 31, 2000. The
decrease was primarily a result of lower average long-term debt balances.

For
the six months ended December 31, 2000, the Company recorded imputed interest expense of $1.1 million related to the beneficial conversion feature on the
$12 million subordinated convertible debentures.

Three Months ended December 31, 2001 as Compared with Three Months ended December 31, 2000

The
Company's license and research revenue decreased to $44,000 for the three months ended December 31, 2001, compared to $396,000 for the three months ended December 31,
2000.

Research
and development expenses decreased by 40% to $8.4 million for the three months ended December 31, 2001, compared to $13.9 million for the three months ended
December 31, 2000. The decrease in expenses was primarily due to a $4 million decrease in payments to outside researchers for clinical trials and other product development work, a
$1.3 million decrease in staffing costs for employees engaged in research and development activities, as well as other decreases related to the Company's research and development activities.

General
and administrative expenses were $1.9 million for the three months ended December 31, 2001, compared to $2.3 million for the three months ended
December 31, 2000. The decrease in general and administrative expenses was primarily due to decreased professional fees.

Investment
income was $72,000 for the three months ended December 31, 2001, compared to $514,000 for the three months ended December 31, 2000. The decrease was primarily a
result of lower average cash and short-term investment balances.

Interest
expense was $375,000 for the three months ended December 31, 2001, compared to $569,000 for the three months ended December 31, 2000. The decrease was primarily a
result of lower average long-term debt balances.

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Alliance
expects to continue to incur substantial expenses associated with its research and development programs. Operating losses may fluctuate from quarter to quarter as a result of
differences in the timing of revenues earned and expenses incurred and such fluctuations may be substantial. The Company's historical results are not necessarily indicative of future results.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

The Company is or has been exposed to changes in interest rates primarily from its long-term debt arrangements and, secondarily, its investments in
certain securities. Under its current policies, the Company does not use interest rate derivative instruments to manage exposure to interest rate changes. The Company believes that a hypothetical 100
basis point adverse move in interest rates along the entire interest rate yield curve would not materially affect the fair value of the Company's interest sensitive financial instruments at
December 31, 2001.

Item 6. Exhibits and Reports on Form 8-K



3.1

Certificate of Amendment of Certificate of Incorporation, dated as of October 16, 2001, as filed with the Secretary of State of the State of New York, to amend the Company's Certificate of Incorporation to provide
that every five shares of the Company's existing common stock was being combined and reclassified as one share of issued and outstanding common stock, pursuant to the Company's 5:1 reverse stock split. Filed as Exhibit 99.2 to the Company's
Current Report on Form 8-K, dated October 18, 2001.4.1

Form of Purchase Agreement by and among the Company and the Investors listed on the signature pages thereto. Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K, dated October 31, 2001.4.2

Form of Registration Rights Agreement by and among the Company and the Investors named in the Purchase Agreement. Filed as Exhibit 99.3 to the Company's Current Report on Form 8-K, dated October 31, 2001.4.3

Form of Warrant to purchase shares of the Company's Common Stock. Filed as Exhibit 99.4 to the Company's Current Report on Form 8-K, dated October 31, 2001.4.4

Form of Contribution Agreement by and among the Company and the Holders set forth on Schedule 1 thereto. Filed as Exhibit 99.2 to the Company's Current Report on Form 8-K, dated November 30, 2001.






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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned
thereunto duly authorized.

| | ALLIANCE PHARMACEUTICAL CORP.(Registrant)              
| | -------------------------------------------------------
| | /s/TIM T. HARTTim T. Hart
Chief Financial and Treasurer

Date:
February 14, 2002

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